What are the CGT consequences if a person disposes of a primary residence to a spouse and child?

Q: What
happens if a person dies and leaves half of a primary
residence to her husband and the other half to a trust for the child? I
know there is no tax on the transfer to
the husband but what about the other half? Do you get a primary residence
exclusion, and cut that exclusion in half and apply the apportioned amount to
the other half of the gain, or does the division of the exclusion not apply? If
it doesn’t apply and the full R2 million is used then the client definitely won’t
have to pay any CGT, but if I can only use half in this instance (roll-over +
tax part in one transaction) then she will be liable for CGT. It seems simple,
but I have never had a disposal exactly like this before and I cannot find a
specific example that fits this situation. My gut tells me you must take only
have of the exclusion otherwise it would be a skewed calculation. If there was
going to be no CGT anyway, I would not even ask but in this case there might be
CGT!

A: We have assumed that the husband does own 50% of the house already. On
death the assets are deemed to be disposed of to the estate (par 40 Eighth Schedule
of the Income Tax Act) or to the surviving spouse (paragraph 67(2)(a) Eighth
Sch read with para 40(1)(a)).

As the asset is
disposed of to two separate persons we are of the view that the disposal should
be treated under paragraph(para) 33 of the Eighth Schedule of the Income Tax
Act, as a part disposal to determine the base cost and proceeds applicable to
each disposal.

The disposal to
the husband as connected party would be deemed to be equal to proceeds of
market value (para 38). However as the disposal is by way of the testament to a
spouse it is treated in terms of para 67 whereby the capital gain or loss must
be disregarded and the asset is not deemed to be disposed of to the estate.
Para 45 (primary residence exclusion) is applied against the aggregate capital
gain/loss so there would be nothing to apply the primary residence exclusion
against for this disposal. Para 67 would then override the normal base cost
rules as to being disposed of at market value by essentially just giving
rollover of the base cost to the husband.

The part disposed
of to the child’s trust (we assume a special trust for a minor child) will be
dealt with under para 40 where the asset is disposed of at market value to the
estate which then will dispose of it for this value (i.e. no CGT on disposal in
estate) to the trust. The proceeds for the disposal to the estate would be
deemed the market value (in terms of para 38 as the child is connected to the
mother and the trust connected to the child) and the base cost would be
allocated based on para 33 (if the interest is given in equal shares then 50%
of the base cost) in calculation of the capital gain. The primary residence
exclusion must be apportioned in terms of para 45(2) between the persons who
held an interest in the property. If the husband already held 50% the wife
would only be entitled to 50% of the R2m capital gain exclusion in para
45(1)(b). In our view the exclusion ties to the structure and a taxpayer is
entitled to claim the full exclusion available (See also para 11.3 SARS CGT
Guide issue 4) and in our view the law does not compel the R1m available
exclusion to be reduced by half due to the part already disposed of to the
husband, as long as only R1 is utilised for the wife in respect of this primary
residence. Accordingly the full R1m would be available to offset against the
aggregate gain for the disposal to the trust as calculated in terms of para 33.
To avoid further complications it may be better to treat the disposal to the
child as being first in time (i.e. date of death which is before transfer of
ownership disposal to husband per para 13) when 50% interest is still held by
wife as this would prevent any argument that at later disposal only 25%
interest was held and therefore only R500K is available as exclusion.

Please note that
if the residence had been used partially for trade (e.g. a home office) or had
been leased during the period of ownership, the R1m exclusion would have to be
further apportioned (para 49).

Disclaimer: Nothing in this query and answer should be construed as
constituting tax advice or a tax opinion. An expert should be consulted for
advice based on the facts and circumstances of each transaction/case. Even
though great care has been taken to ensure the accuracy of the answer, SAIT do
not accept any responsibility for consequences of decisions taken based on this
query and answer. It remains your own responsibility to consult the relevant
primary resources when taking a decision.

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